Why agencies should follow Social Chain’s M&A strategy

As today’s digital age continues to evolve, media cultivation is becoming increasingly important. Agencies that sew the digital fabric of networks together are constantly looking to expand their reach. One such company is Manchester-based marketing agency Social Chain.

So how did Bartlett transform his team of six to an agency of gargantuan proportions?

Using M&A To Build An Agency

The answer lies in Social Chain’s M&As. Yes, Bartlett is unquestionably a bright spark and his ability to recognise the importance of digital media reflects his sharp business acumen, but Social Chain’s partnerships with other players in the field is where the company’s success lies.

In 2018, Social Chain already had a portfolio of 400 multi-channel brands across social media. Looking to grow even further, the company then acquired Glow Media Group. The acquisition provided Social Chain with even further reach, as well as bringing in internationally recognised brands such as McDonald’s, the BBC and Nintendo.

One year later, Social Chain continued with its expansion, merging with German online retailer Lumaland –estimated at €186m.The move was particularly interesting as Lumaland’s business model is focused on retail, which is somewhat a departure from Social Chain’s social media branding. Nonetheless, Bartlett saw value in the German retailer due to its focus on targeting millennials.

Retail strategist and marketeer Alex Vaughan said of the merger: “In merging with a brand that has products to sell; we would expect most advertising agencies to lose their nonbiased status and work with fewer external partners. In this case, Social Chain can be expected to continue to grow its external brand revenue.”

Unlocking The Holy Trinity

“The reason for this is because brands working with Social Chain do so because they can help unlock the holy trinity: millennials (and now centennials) who almost shop like aliens, growth of digital channels that effectively perform as ‘earned’ media and most importantly because social media is increasingly becoming a sales driver.”

By merging with what would otherwise potentially be a client, Social Chain was able to not only sell Lumaland products but was able to capture the German retailer’s audience too. Consequently, the merged companies were able toreach 1.8bn people a month worldwide.

This was still not enough for Bartlett.

In early 2020, Social Chain acquired a series of companies with a combined revenue €35m (expected to earn €50m by the end of the year). The companies were superfood experts Koro, digital marketing specialists DRTV, supplement suppliers Solidmind and interior branding company Urbanara.

Again, these companies are not quite in line with Social Chain’s core business but having them under one powerhouse amplifies the brand’s social-first message.

Social-First Brands, Social-First Media

“Social Chain will become a global leader in building and scaling owned social-first brands and disruptive social-first media and marketing services,” Bartlett said.

“With these strategic acquisitions, we’re now laying the important foundations to deliver that ambitious global vision. Today’s announcement sets us up to further accelerate our growth across 2020. The industry should brace itself!”

As if this wasn’t enough, Social Chain announced yet another acquisition in 2020 – amid the Coronavirus pandemic no less. Now owning a 51% stake in California digital agency A4D, Social Chain nowforecasts a turnover of $220 millionwith profits of $9 million. A4D’s annual turnover is in excess of $35m, making the acquisition Social Chain’s largest yet.

Grow West

Bartlett’s interest in A4D stemmed from Social Chain’s growth in America. By acquiring A4D, Social Chain hopes to accelerate its already rapid expansion in the west.

“Our fastest growing international market over recent years has been the U.S,” Bartlett said. “In 2019 we saw our revenue increase by over 150% in the U.S. We see it as possibly the world’s most important advertising market and plan to expand aggressively in that region over the coming years. This is the just one of many steps in strengthening our global marketing services proposition in a substantial way.”

Social Chain has not been shy about its “acquisition offensive” and “aggressive scaling” strategy as it strives to be one of the world’s biggest media groups.

Whilst growth is a key metric of business success, it is often where companies struggle. Through M&A, Social Chain was able to expediate the process of growth by taking on companies that already achieved success in their respective fields.

M&A Inspiration

At this point, Social Chain seems like a giant that is too big for smaller firms to relate to. However, Social Chain’s journey should inspire companies of any size to consider M&A as a scaling strategy.

Over the six years that Social Chain has grown from a university drop out’s bedroom idea to a media agency giant, other firms that take it upon themselves to grow organically through their own means have been left behind.

Social Chain has demonstrated that M&As are powerful shortcuts to scalability. In industries where growth is fundamental to their business models, companies of any size would be foolish to disregard such lucrative potential.

Capital A is an agency M&A expert. We only work with creative agencies. If you’re interested in talking to us about your buy & build strategy, fill out this brief questionnaire.

]]>Are you experienced? The future of experiential marketing…http://www.capitala.co/business/17788/are-you-experienced-the-future-of-experiential-marketing/
Tue, 02 Jun 2020 14:32:23 +0000http://www.capitala.co/?p=17788What is the future of experiential marketing? If you were to build an agency from scratch how would it look? What businesses would you acquire to build it into an experiential powerhouse?

We know that experiential works, but things have changed massively, would you need new types of experts on your team, more of a focus on health and safety, maybe experts in spatial planning that can keep a flow of people freely moving without bumping into each other?

To save having your lunch eaten, let’s look at that model again. You can build out a broader set of skills for your agency: Create digital first, video first experiences, augment with VR and AR, bolster your team with 3D spatial planners and safety experts so we can do this thing IRL not just WFH.

Experiential agency acquisitions

If you’re an experiential agency owner are you thinking about building out your skill set so you can augment your live experiences more easily with virtual or hybrid events.

Would you acquire a digital agency, one with VR or AR capabilities? Could you bring your range of services to the digital world and improve the offerings of digital agencies?

How about talent acquisition, can you grow a pool of owned talent, creating branded experiences on O&O channels, creating and selling your own digital products on your own ecommerce platforms?

The future of experiential

The future of experiential marketing is an exciting one that will no doubt continue to break the rules and create unforgettable experiences for brands and brand ambassadors.

There is a much larger picture for all types of marketing agencies to look at building a 360° agency model where you own the audience, own the marketing and own the products.

They have built agencies that brands flock to for campaign design and management, social and video first campaigns that reach Millennials and Gen Z, but also own their own digital channels, experiential events and develop products to sell on their own ecommerce platforms.

You don’t have to be a twentysomething hotshot to create these kinds of businesses either, Shane Smith, Gary Vaynerchuk and Justin Gayner whose brilliant Hit Networks is the perfect 360° business model of the future, have all trailblazed the pathway for the digital natives to follow.

Experiential agency model for the future

So where would that leave an experiential first agency who has to build every campaign from nothing versus a 360° agency which has everything set up and ready to go, just hand them your brand assets and let their talent fly across their own channels, or the brands channels, or both.

To save having your lunch eaten, let’s look at that model again. You can build out a broader set of skills for your agency: Create digital first, video first experiences, augment with VR and AR, bolster your team with 3D spatial planners and safety experts so we can do this thing IRL not just WFH.

Deliver your experiences across not only the client’s channels, but use paid media for reach, you have paid media experts on your team now, right? You’ve bought in talent and you have your own Tiktok accounts for 20 different passion points and fortunately that social ecommerce business you just acquired will give the client some easily measurable ROI.

What about your experiential agency?

How are you thinking about experiential agencies in the future, do you have your own ideas?

At Capital A we specialise in creative agencies, helping our clients to build & buy the agencies of the future. If you would like a no-commitment conversation with myself or one of our experts, fill in this questionnaire and we’ll be in touch to set up an appointment.

]]>How to sell your agency during the COVID crisishttp://www.capitala.co/business/17606/how-to-sell-your-agency-during-the-covid-crisis/
Fri, 22 May 2020 14:11:55 +0000http://www.capitala.co/?p=17606Lots of agencies are contacting Capital A right now and wanting to know what their options are, the COVID crisis has forced business owners into thinking about a sale or going into administration.

With that in mind, you need to get a realistic valuation calculated. What tends to happen is that companies heading for distress get realistic offers, which they refuse and then they get into trouble and have no option but administration.

The valuation by a specialist

Firstly, if you ask a valuations specialist to value your company they will always give you a high valuation.

I don’t know why valuation experts do this, as it sets a high expectation that you will never reach when you go to market. Particularly if your business is turning over less than £5m.

Valuations vary wildly anyway, but always depend on what the buyer is prepared to pay and this is always less than a seller would prefer to sell for.

The biggest reason agency owners walk away from offers

The biggest reason is that sellers want to walk away a millionaire, actually £500k is a very life changing amount of money too, so this need for a million in the bank seems quite arbitrary and is just a cultural phenomenon.

It’s a shame because in my experience it’s significant in scuppering a lot of potential deals in the first instance and actually if sellers were more realistic there would be a lot more transactions closed and happy sellers.

I’ve explained how to value your agency below. As there is no single way to value a company, then this needs to be used as a guide.

Also bear in mind that I work with agencies which are service companies. More often than not agencies do not own any IP, stock or real estate and so the valuations are fairly straightforward. If we are valuing AV, publishing or tech businesses then the valuation would need to include IP or stock also.

How to value your agency

Firstly you need to get your EBITDA which is essentially your operating profit. Accounting nerds will argue the toss on this one, but it’s basically your bottom line profit before you’ve paid tax on it. You need this number for the last 3 full trading years. Some companies will ask for 5 years but they are a** h****.

You then need to adjust your EBITDA for any dividends you have paid out to shareholders who work in the business and don’t take a full salary via PAYE. I’ve explained why before in this post, so won’t explain again, suffice to say that if after your company is bought and you are now a full time employee, the cost of you will need to be removed from the profits we are trying to predict going forward.

You then need to multiply your adjusted EBITDA by a multiple. This is where the random element comes into play, as obviously any movement on this number represents a whole year of profits and also money in your bank account.

How many multiples

Businesses turning over less than a million will not command huge multiples, often they could only get 2-3 times multiples at this level. Over a million but less than £5m turnover, you should expect 3-5 times multiples.

Over £5m with a healthy profit margin of 20%+ and you should definitely be leaning towards 5X, over £10m multiples can be double the multiples and can sometimes start being valued at multiples of revenue rather than profits. Crazy, I know, but that’s why you should be talking to me about being part of a roll up!

If you have a healthy business and you don’t need to sell, I would say hold out for a 5X, you should be happy with yourself with 4X, especially with a 3 year earn out as you are getting paid for year 4 for profits you don’t need to work for. Every company should be getting 3X at least, unless you are in distress or you want a quick sale.

The formula looks like this:-

EBITDA – DIVIDENDS * MULTIPLE

Example of a company valuation turning over £2m

An example would be a company which for the last 3 years has averaged £200,000 EBITDA, the director and single shareholder is paying themselves £100,000 per annum. Our normalised EBITDA is £100,000 and we negotiate a multiple of 4, as we are doing a three year earn out and are a motivated seller. So the valuation of the business is £400,000.

So even though the business is turning over £2m, can you see how the business is not worth millions? Expectations from the seller is that because they are seeing millions coming into the business that they must be worth millions, but actually a 10% net profit can be quite normal and then an owner operator would be paying themselves in dividends.

Why you should be happy with less than a million for your agency

Now, I’m going to explain why you should be happy with this valuation, as I see so many owners of agencies pooh pooh what they are considering a low valuation of less than half a million.

So let’s say you get a fairly standard offer of 50% up front and a three year earn out. In year one you will be paid £200k on day one and then you will earn £100k by the end of month 12 as salary.

Year two, day one, you get another £66k of your earn out and by month 24 you have another £100k salary, the same goes for year three and then a final sum at month 36.

How much you really get paid

So you can see why the valuation less than a million quid is actually a good deal for the seller if they finish their earn out, you will be paid £400k in cash taxed at 10% and £300k in salary taxed at 40%, so the total after tax is £540.

If you had continued in the business as you were, you would have taken home £240k over the 3 years assuming you pay around £20k in tax each year.

Now, is that going to make you a millionaire? Not yet, but after three years when you have finished the earn out, assuming you were able to live on the £80k take home you were on before, you should have £300k left in your bank.

This’s enough to put a deposit on a property worth £900,000 or to buy another business turning over £6m. It certainly gives you more options than if you had of continued as you were for the three years.

Bloke down the pub

I know many big shot CEOs will argue that they would rather stay in control of their own destiny than sell out for £400k, but the reality is that left in charge of the same business without any major reinvention most businesses hit a ceiling of a few million and actually without fresh eyes or some investment don’t change much over a longer period.

Even agencies within larger holding companies tend to max out just over £5m turnover and don’t really grow substantially beyond that.

Now that’s not to say that you can’t grow a business over £5m, but there is usually an outside factor like private equity or some other kind of investment event that boosts these companies into the bigger leagues.

The real reason you want more than £400k is so you can say to the bloke down the pub that you sold your business for millions and you don’t have to work anymore. The reality is that many entrepreneurs that sell their companies can’t wait to get onto the next business idea. You will have funds to grow that business this time around.

Also, you have to understand that this is extra money in your bank, usually you are spending the £100k you’re paying yourself as it comes into your account on living expenses. £400k of free liquid money in your account is massively life changing for most people. Don’t let your ego keep you on the hamster wheel.

At Capital A we find buyers for your agency quickly. We can get you in front of hundreds of potential buyers very quickly, all under the radar as your company isn’t advertised on any notice boards and no identifying details are released until potential buyers are in strict NDAs. Contact us here for a discreet chat about buying or selling agencies.

It would be an agency for our new age, for a transformed society which was always on, location agnostic, platform agnostic, sometimes working, sometimes relaxing, using multiple devices everywhere. Mobile first, social media first, video, content, eCommerce, data.

We would focus on content creation and first party data, growing O&O brands and eCommerce. We would be creating a nimble agency, producing great work quickly, with super high standards of execution and providing value for money for our clients.

So what would this look like if we built from scratch? Well, it certainly wouldn’t be from scratch, we’re acquiring and merging other agencies into a super agency.

Digital but experiential

Agency A would be purely digital but we like live comms, we know that experiential works, but in the new normal those experiential communications should be more considered. A live comms arm would come with experienced creatives, 3D renderers, placemaking experts. We are creating results for our clients that we can measure, so everything is measured, everything can be A/B tested and results fed back into the system.

We would want to own and operate our own channels as well as freely using third party channels, reaching our audience wherever they are. So growth of our own D2C brands, content brands and eCommerce stores would be an important addition to the agency model. Some good examples of this business model already operating in the wild would be Vice, Social Chain and Jungle Creations.

First party data

Data would be first party, why? Our clients know their customers best, we know our customers too, we have cleaner data, we aren’t being misled by third party agendas. We go first party data first, but we are using aggregate data whenever possible so we can join the dots across networks, but we store our own data, so eventually everything becomes first party.

Video first

The content would be video first, it’s more engaging, it stops people scrolling, we can create two way interactions more easily by capturing the imagination of audiences and creating relationships between our brand ambassadors and the brand’s customers when it’s influencer created the closeness the customer feels to the influencer is irreplaceable.

We would still create lots of written content, the written word is powerful, more portable and is cheaper, more scalable and quicker to create at a predictable quality. Match it with powerful visuals where needed.

Weekly podcasts, daily vodcasts, not only for ourselves but creating for our clients too. We now know that we don’t even need a studio to create passable audio and video, perhaps even there’s a trend for badly produced homemade looking / sounding content, so we’re really giving strategic advice to our clients on how to make homemade videos. Let’s hope we’re out of lockdown mode soon, so we can access those big budgets!

WFH or work from office

This is a post-COVID agency we’re discussing, so we have to mention how we’re physically going to make this agency work, we can have a couple of global locations, actual offices we call home. It makes sense to be in London, New York, Malibu, Amsterdam, Hong Kong and Istanbul, but this time around, we are only talking about where some of our talented staff may live, offices can be virtual, or hotdesking at Soho House in Mumbai or Toronto.

Some of our staff may work from home, certainly all would be welcome to on any given day if that’s where they are most comfortable being creative, or maybe the repairman is visiting that day or you just need to be home to pick up your kids from school once in a while?

Influencer talent

Agency A would want its own talent, or influencer agency. There are two models, either the Goat Agency, who don’t own any talent, every campaign they find the right talent for the brand or Social Chain who own their talent and acquire and monetise their channels.

Agency A will be a buy and build project, using a single balance sheet approach. We would need two pillars, content and data, art and science.

How about a bit of both, we buy up influencers into an exclusive agency, acquiring and monetising their channels with them, developing eCommerce brands and businesses. We also work with influencers on an ad hoc basis, working with brand ambassadors or niche influencers who help us to target audiences in an engaging and genuine way.

Our clients can access our talent’s audiences or we can reach new customers in new places when the need arises. The important thing is to adapt for the right occasion and specialise in reading the data, measuring, adjusting and refocusing the campaign.

Experiential is measurable

We create experiential events, this is content also, people often associate events with something other, but it’s 100% content IRL. We can measure footfall, engagement, eye tracking, social media hashtags, location tracking. I love what Complex’s Rich Antoniello has done with the creation of ComplexCon, this is a real tour de force on how a media company can leverage their audience and O&O and create not only an experiential showcase for their own audience but also the brands of their clients.

360° Vices

Of course, there are many great examples in recent history of the media company transforming into an agency hybrid. The creation of the 360° agency of the future, with owned and operated platforms was nearly there when Shane Smith transformed Vice from an edgy fashion mag to where it got to in the mid Twenteens, it feels like it has lost its way under new leadership, maybe looking to purely focus on their content up front and still doing the agency thing to work with brands, but in a more subtle way than that continuous building from the Smith era, where he seemed set on acquiring more and more agencies.

Vice was an expert in mixing content with brand engagement, they owned a pub, they owned an experiential agency, they put out TV content, web, video, merch, yada yada. They perhaps forgot to provide clients with measurement data as much as they could have, but they looked cool while doing everything they did so should be applauded for that.

Building the agency

Agency A will be a buy and build project, using a single balance sheet approach. We would need two pillars, content and data, art and science. We need the creators and the boffins under one roof.

The content business would be video, social content, web, written, photos, podcasts, webchats, etc. The content business would operate like a media company, constantly pumping out content, either for engagement with us or our channels or brand content across socials, their channels or IRL.

The data business would inform the creative in terms of where we place the content, measure its engagement, measure and guide success and failure. The data business would be a programmatic and analytics focused business. It would own and develop systems for measuring engagement online and in the real world.

How to build the agency from scratch

So what would this look like if we built from scratch? Well, it certainly wouldn’t be from scratch, we’re acquiring and merging other agencies into a super agency. Number one and two moves would be acquire a good solid content agency, social first and really great engaging visuals and copy, creatives who thrive working on campaigns and a solid leadership team. Second would be a media planning agency with IP in measurement, with plenty of first party data access, wall to wall techy nerds and data analysts. We would want to offer pure play digital services, PPC and SEO and have the homegrown talent to execute campaigns.

Onto that initial merger you could bolt on your services and talent from other agencies as you go. We need an experiential expert in there, so an agency with some awards under their belts, a social only agency who know how to target Gen Z on whatever the latest platform is, be it Tiktok, Houseparty or Zoom. We’re also looking for some great video talent, so a dedicated visuals agency. Some brand talent, we’d be looking for something really hot like from an East London or Berlin based urban attuned agency, something that has been growing quickly and winning business from larger competitors.

Financing the deals

How would you finance Agency A? You could raise a first round from media and advertising investors, private equity or go to the bank and get some cash. Remember you are offering a company cash and paper, performance related and you would want to put a bit of seller finance in there, so maybe 50% upfront, half cash and paper. Three to five years for rest of the money and shares to vest or earn out. So you don’t need huge amounts of cash upfront. As we go we can afford more companies by leveraging the balance sheet and use as much money from elsewhere as possible, mezzanine finance and investors.

Retaining control

You have to retain control of the holding company, so separate share classes for you and your team, you don’t want to be running a democracy with lots of big personalities always fighting every big decision or steering us all over the place. However, we are advocating a merger mentality, every business you acquire is a merger and the new leaders come in with some skin in the game and money off the table.

Also, you don’t want to be in the trenches with the leaders of each division or agency. Make your merged businesses be accountable for their own bit, let their leaders lead their own teams and then focus on advising and providing resources for your leaders. As the chairman or CEO of the group, your job is to be the face to the business world, position yourself as a thought leader and someone who can rally more investors. The CEO of the group should be the trusted face of the group and be continuously reaching out to other leaders for partnerships or media opportunities.

Opportunity of a generation

This roll up of several smaller agencies into a 360° media agency isn’t easily done, but it’s doable and during this current situation with COVID-19 there are a tonne of good agencies who would be more happy than usual to throw their lot in with a bigger organisation to provide some stability and a safe harbour. They will be available at better value valuations and more open to negotiation for a realistic price than before when the future was looking more rosy. Perhaps a once in a generation opportunity is staring you right in the face?

You need to find the agencies first, it could take ages unless you have built the right team who can get you in front of a number of agencies quickly like we have at Capital A. We can find a number of agencies quickly and get you in conference calls quickly. You then need to make the offers and get the deals done, we negotiate the deals with you and work with some of the best M&A lawyers in the business and our analysts are all ex-major investment bank alumni. Start your search today.

Some agencies are already going bust, faced with poor cash flow from years of undercharging clients and over paying freelancers the Coronavirus crisis has accelerated the inevitable, there are great talented people suddenly looking down the barrel of a gun, having to choose whether they will furlough or fire their staff and what sometimes feel like friends and family.

smart movers will be able to roll up agencies into small holding groups that can offer a wider breadth of services to an instantly larger pool of clients

Andy Day, CEO – Capital A

The smart movers will be able to roll up agencies into small holding groups that can offer a wider breadth of services to an instantly larger pool of clients. By rolling up agencies into one group, the founders of agencies who don’t necessarily suit running a business when times are tough get to step back and focus on what they’re good at, which is probably running teams and flexing their own creative skillset within the business rather than on it.

Roll ups win bigger

A roll up helps a group of struggling companies save money across some back end functions, share knowledge at the top levels and win bigger contracts on a global scale, especially if the acquired companies are distributed across cheaper creative hubs, ie not just London or New York but maybe Amsterdam, Berlin, Wellington or Mumbai.

We have seen this model for years with the classic holding agency business model, but newer groups are looking at newer ways of doing business, where roll ups are more fairly owned.

Sir Martin Sorrell has founded a listed company which merges with targets instead of outright acquiring agencies. He pays cash for half the agency and offers stock and a board seat for the other half for larger agencies (just stock for the smaller and more recent ones).

Roll ups are mergers

While Sir Martin retains 20% of the company and the founders of MediaMonks with whom he merged the business with first, also retain around 5% each, newcomers have the opportunity to take some money off the table as well as supercharging their growth within a bigger entity.

This business model could be replicated at a much smaller level by savvy agency owners who have good cash flow and can bring in agencies which are currently going to be undervalued anyway for much less cash than they would have to pay for a full acquisition.

These rolled up groups will be able to leverage the current global crisis to their advantage and help struggling agencies back into profitability and secure long term jobs.

Single leader of the merger

The important thing here is that there needs to be one or two lead agencies involved in the initial merger, or one agency and one source of knowledge or finance. There has to be a single leader that brings the deal to the table and runs the group as CEO or Chairman. Otherwise, you get too much democracy, too many personalities taking votes for everything and gridlocked decision making.

Going back to Sorrell’s model, his company structure ensures that he can never be outvoted on decisions and that the other shareholders cannot unite against him to take control of the company.

Replicate the roll up

It would be a smart move in the current climate to replicate this type of roll up and create an agency group at any level up and down the spectrum of agency sizes and niches. The smarter agency owners will already have been planning this type of strategic buy and build blueprint anyway, but were lacking the impetus to put their plan into action.

Now is one of the greatest opportunities in a generation to build this kind of agency, to roll up a group of likeminded, talented agency founders into a strong board, lead by someone willing to take the risk

Andy Day, CEO – Capital A

Now is one of the greatest opportunities in a generation to build this kind of agency, to roll up a group of likeminded, talented agency founders into a strong board, lead by someone willing to take the risk and start the ball rolling, approach companies and make acquisitions, or more rightly – mergers – without having to require masses and masses of cash. A once in a generation opportunity to build a global agency from next to nothing.

At Capital A we work with agency owners and CEOs, to find and acquire off market agencies. We only work in the creative and media sectors so our network is extremely strong in this area.

Our clients are creative businesses, mostly digital, content and live agencies and all of them have been effected by the global pandemic, of course. However some of them have been effected in more positive ways than others.

The global events industry for instance has been put on pause and most large scale events, if they’re even beginning to offer dates for a reorganised event, are looking at September time. This has meant some businesses losing their money, either already invested in deposits or fees earned going away.

However, our digital clients and some events clients who have already developed ways to adapt to digital during the great pause have been onboarding new clients and hiring new staff.

The same can be said with the M&A industry at large, we’re seeing three main groups form, the first group is the abandon everything brigade. These are mostly lead by big investment companies who want to pause while they take care of the companies they’ve invested in and very small agencies who can’t afford to take any risk. They make up for about a third of all M&A and so the reported downturn of transactions stems from this group.

The second group is the business as usual lot, not necessarily risk averse, so much as a downturn was always on the cards anyway and now we’re seeing it and they see undervalued companies which are ripe for acquisition. This group are always active in a downturn and will drive consolidation across all industries as they prefer to shop around when they can get the best value.

Part of their optimism will be that there’s an opportunity to find undervalued businesses and the other part is that they have loads of time on their hands and having a bigger pipeline to explore gets them from under their kids feet. When we’re all allowed out of the house, these guys will be ahead of the game with due diligence done and plenty of deals ready to close.

The third group, is made up of those who have been sitting on the fence whether they would like to buy or sell and have now had their hand forced. Either they can see the end of their runway is closer than they wanted and they are now actively looking for acquirers OR they are now a buyer, where they see fresh opportunities with talent and client lists coming onto the market and rather than wait any longer they are going to jump in with both feet and explore some dealmaking.

Personally I think anyone burying their heads in the sand with an approaching global recession is not going to fare well anyway. Yes, you can sit on your cash reserves and furlough staff, those are good things to do, but if you sit and wait there will be other first movers gaining the opportunities in the marketplace and whatever vertical you are in they will be adapting and stealing business.

I see a huge opportunity for the 2nd and 3rd groups, M&A takes ages to sort out anyway, even if everyone in the room at the first meeting wants to do the deal, you’re looking at a couple of months to get the contract and due diligence done on a small deal, a larger one, much, much longer. So why put plans on hold and set your calendar back a couple of months, when you can use time wisely now.

There is also the fact that many businesses may get into trouble during the next few months and while some messages to analysts I’ve seen have referred to bottom feeders looking for deals, I believe that with the best of intentions we are making our services available during a difficult time to help real people keep their jobs and real founders find an opportunity during a time when they may be faced with turning the lights off on a business that they have run for many years.

So, the bottom line here, is that, yes, there’s some changes in the market. There is definitely extended timelines being added to deal closures. It looks like most dealmakers will wait the two months until June 1st before they close any deals they had on the table. However, no, there isn’t a massive downturn in M&A activity right now. I am seeing lots of businesses come to the market on both sides of the table and while some business owners definitely won’t have the stomach for selling or acquiring, the most adaptable entrepreneurs will be looking to step up their game and increase their pipeline over the next 8 weeks into summer.

If you are thinking about acquiring or selling a creative agency then get in touch. Capital A works with creative agencies helping larger agencies to use acquisitions for growth and founders to exit their businesses. We only work with agencies, so our understanding of the industry and network when finding and closing deals is incomparable.

]]>Aeorema Communications Plc make acquisition of London based Eventfulhttp://www.capitala.co/business/16527/aeorema-communications-plc-make-acquisition-of-london-based-eventful/
Tue, 31 Mar 2020 16:24:30 +0000http://www.capitala.co/?p=16527Capital A client Aeorema Communications plc have acquired Eventful,
a London based events agency.

Eventful are a venue sourcing, incentive travel and event management company
that works primarily within the luxury retail, IT and oil & gas sectors.

The agency counts brands such as Ralph Lauren and Informa
among its loyal portfolio of clients across multiple industries, including
manufacturing, oil and gas, professional services, luxury retail, entertainment
and finance.

As a board member of the Society for Incentive Travel
Excellence (SITE) Great Britain Chapter, Caroline is a well-known figure in
this lead growth sector.

Caroline and team will be working within the Aeorema Group,
providing specialist knowledge into the organisation of smaller scale and
high-value internal corporate meetings, conferences and training.

The Acquisition, which is immediately earnings enhancing and
expected to grow fee-based revenues, gives Aeorema entry into the venue
sourcing and incentive travel markets, enabling the company to provide a
full-service events solution to clients.

Eventful will continue to trade under its own name as a
wholly-owned division of Aeorema Communications plc alongside Cheerful
Twentyfirst.

The deal provides both agencies with reinforced cross
pollination and upselling opportunities. “The acquisition gives Cheerful
Twentyfirst and Eventful the opportunity to join forces when tendering for new
clients, and working with existing clients, where the combination of the two
companies’ skills will be highly complementary,” said Aeorema chairman Mike Hale.

“Recognising we are in unchartered territory with the current
COVID 19 virus outbreak, we believe strengthening and adding to the Company’s
offerings to current and new clients supports our business model going
forward.”

Caroline Lumgair, Founder of Eventful Limited, commented: “I
am delighted to be joining Aeorema’s established and respected live events
agency. The synergies to be gained from
the Acquisition will benefit present and future clients of both Cheerful
Twentyfirst and Eventful.“

We wish the team at Aeorema, headed up by CEO Steve Quah,
all the best with the new acquisition. Capital A will be continuing to work
with the board on acquisition targets building a broad events based business
within the Aeorema holding company.

]]>Why is EBITDA adjusted for dividendshttp://www.capitala.co/business/16130/why-is-ebitda-adjusted-for-dividends/
Fri, 23 Nov 2018 11:49:52 +0000http://www.capitala.co/?p=16130When an acquiring company values a business they usually do this by multiplying EBITDA by a multiple. Often their goal is to try and reduce the amount of earnings that can be included in EBITDA and then pay as small a multiple as they can get away with, or that they can pretend is the industry average for the type of business they are buying.

I hear so many times the negotiator on the other side of the table say that they are calculating the multiple using this and that data, but I’ve seen these multiples vary so wildly that it really can only come down to one thing: how much they are willing to offer for the business. I recently noted that an agency was valued at 7 times EBITDA, while another one was only 4.5 times EBITDA, for all intents and purposes the two businesses were alike in every manner. The only thing that really separated them was that one business had an advisory representing them while the other, negotiating an exit for the first time and lacking in experience in what to ask for, could only rely on what they thought they might be worth.

Once we have separated the multiple from the equation, the other factor is EBITDA, and more importantly, keeping as much of it as intact as possible. Buyers will often try and make as many deductions from EBITDA as possible, some of these deductions are extremely reasonable while others are spurious at best. One of the most common adjustments made to EBITDA is for dividends paid out in previous years and this is perhaps the fairest. Why is your EBITDA adjusted for dividends? Shouldn’t the EBITDA include the full amount of dividend as a dividend is paid directly out of earnings after tax?

The reason EBITDA is adjusted for dividends

The reason for this is the way that most small businesses manage the tax affairs for the shareholders who work in the business. Often the shareholders will pay themselves a below the market salary that keeps them on the tax and insurance radar but not enough to put them over any tax thresholds and then pay themselves dividends that would make up a normal wage but pay a much lower tax rate. They can legally do this as a perk of being a shareholder AND an employee at the same time.

Once they have sold the business to new owners, although they will continue to be an employee of the business they will no longer be a shareholder and as they can no longer exploit this tax advantage their wages going forward would be removed at the point between Gross Profit and Net Profit where EBITDA is calculated after overheads have been removed. As the new salaries that the new owners are paying to the former owners is now reducing the EBITDA, they will want to reflect this in any calculations they make for the value of the company for previous years.

So for instance the previous year’s EBITDA may be £500,000, the directors are paying themselves £12,000 and taking a £108,000 dividend. There are two directors in the business and essentially they are paying themselves £120,000 each. As their £12k salary was deducted before EBITDA, we can add £24,000 back in, but we must then take away the two dividend payments of £108,000, totalling £216,000. Our calculation will look like this:

£500,000 + £24,000 – £216,000 = £308,000

So now we have an adjusted EBITDA which reflects a business where the two directors are paid as normal employees of the business and not as two cheap employees and two nicely paid shareholders. In a parallel universe the business would have paid the shareholders in this way as employees had they been hired to do the jobs they had been doing. So, the EBITDA now represents the parallel universe earnings of the company.

When adjusting EBITDA for dividends isn’t fair

There are a couple of occasions where this isn’t fair to deduct a full amount of dividends, in my opinion. The first case would be if the acquiring company is looking to drastically reduce the salaries of the owners in the future years. So for instance if our two shareholders agree to work in the business during their earn-out for a salary of £60,000 each as employees and pay normal tax, then EBITDA shouldn’t be reduced by £108,000 each, but by £48,000 each (EBITDA + £12,000 – £60,000). This leaves the former owners with a much fairer valuation for the business as they are expected to work for much less than they had done previously and so should benefit from their upfront payment or earn-outs being more substantial to support their current lifestyle.

The other occasion where this isn’t fair is where the owners of the business have been re-investing retained earnings into another investment vehicle. This is often property, where the owners of the business have been advised by their accountants or wealth management advisor to put their surplus cash somewhere sensible to generate more revenue for a separate property business, or in a pension pot of some kind. These exceptional payments should not be used to reduce the total EBITDA used for the valuation, rather the acquirers should accept that the director/shareholders are drawing a monthly wage that is made up of salary and dividends. This monthly dividend should be used to calculate the adjusted EBITDA total and not any annual bonus or exceptional dividend drawing re-invested elsewhere and should also be a base salary offered as employees in their new service contracts.

Negotiating valuations using EBITDA

In summary, when negotiating the valuations for your company, don’t be pushed by the acquiring party into an unreasonably low offer that is justified by “normal calculations” being made. There really is no normal negotiation, there’s lots of discussion as to why companies should be valued a certain way, but it seems to me that there is very little evidence backing up these valuations, either on by multiples side or any other adjustments. Acquirers pay what they can get away with, they are balancing what they can afford against what will keep the shareholders happy, especially where there’s an earn-out involved. Sellers should make sure that they’re comfortable with an offer, if they are working within the business post transaction then almost certainly they should work out what they could have earned using the business’s assets themselves during the same time frame as the earn out and then add a 1 or 2 times multiple on, as the seller will be helping build the business after the sale. Of course that needs to be balanced off against job security and other benefits are being offered.

Finally, always remember that a company is only worth what a buyer is prepared to pay. There is some alchemy involved in negotiating a deal, of course, but if a buyer can’t afford what you’re asking then no amount of negotiating will increase the offer. It may be that you will be more comfortable and confident in the outcome that you can expect if you use an advisory firm like Capital A when finding a buyer for your agency and negotiating the terms of the deal, please contact us here for some free non-commitment advice.

]]>9 reasons to acquire a business rather than grow organicallyhttp://www.capitala.co/business/16024/9-reasons-to-acquire-a-business-rather-than-grow-organically/
Thu, 05 Jul 2018 11:40:07 +0000http://www.capitala.co/?p=16024The decision to acquire another business or not should never be taken lightly. While it can be a huge thrill to go out and buy businesses and close a deal, the numbers have to add up and you should make sure that you have an acquisition strategy in place before spending time talking to other companies about acquiring them.

Your acquisition strategy should be clear and thought of in advance, so make sure you understand what you are trying to achieve for the business, what kind of targets are you considering, what size business you are looking to buy, whether you are looking for businesses in distress or not and why, are you able to fix them?

It can be to easy to get distracted, when other companies know that you are looking for acquisitions you can be approached by all sorts of opportunities that might be outside of what you were considering. These opportunities may feel like an opportunity missed if you don’t look into them, however, it can be a slippery slope if you are prone to shiny bauble syndrome.

You may not have considered making acquisitions until now, relying on organic growth rather than making a strategic decision to acquire a business and grow your company in a short space of time. Perhaps you haven’t felt that you have the finances to do this previously, but there are many ways to structure a deal, so finances shouldn’t necessarily get in the way.

Here are 9 reasons why you should consider buying a business

Grow your market share
Organic growth is all well and good, but it takes ages and it can never be guaranteed that what you spend you will get back. Acquiring a business in your market will immediately make you a bigger fish in the same size pond

Expand into a new vertical
Rather than hire some experts in and build a new division it can be quicker and easier to buy your way into an emerging or established industry that you are currently not part of. Again, building from scratch is fraught withe trial and error, while buying a viable business and merging it into your operation can give you instant access to new markets

Increase project pitching ceilings
If you are a service company or agency pitching for new business and you are good at it, you may have hit a ceiling whereby either current clients or new larger clients will exclude or restrict your opportunity size because your current turnover is below a certain threshold. This could be a great reason to buy a smaller competitor so that you are over the lower limits that a client may have in place, allowing you to then pitch for the larger opportunity

Access to a differently skilled workforce
Imagine you are a computer maker and you want to break into the car industry (as if that would ever happen), you could either advertise for car industry professionals and hope that you find someone or you could buy a startup that has already hired the best in the industry. Some times you can’t access the best in another industry if you are not known for it and it could take a long time to build your reputation enough to get highly skilled people involved. Buy the startup, make the cars and put your computers in them. Tadah!

Gain new technology
There may be a piece of software, service or product that you are paying through the nose for, how about acquire a company that already does or has that? Now you’re paying yourself for the service or product. Or look at Google, they bought Android, YouTube, Waze and DoubleClick, all stuff they could have probably built themselves but would have struggled with traction or costs

Improve profit margins
Many times small or new businesses have much higher profit margins because they don’t carry the legacy staff or systems that create baggage and overhead for more established businesses. By acquiring a company like that you will be able to lift the overall profit margin of the business, or increase margins by cutting backroom costs for both businesses like accounting, or other administrative costs.

Remove a competitor
There’s nothing Machiavellian about taking a competitor out in business, it’s just business after all! Having a competitor in the same market can push prices and value down, it can create buyer confusion or it could push marketing budgets up. By buying out a competitor you can deal with some of these problems as well as gain lots of other benefits at the same time

Create new value
The Medicis were an Italian family that grew to huge amounts of influence during the renaissance. They had started out in textiles but ended up producing popes and royalty from their stock. How did they do this? They brought new ideas to old stablished ways of doing things by entering industries that they had no experience in. The juxtaposition of two completely different ways of doing things or experience being brought together will create new value, new ideas and new opportunities, there’s a book called the Medici Effect if you want to read more about this

Allow you to step back from the business
You may have run your business for many years and would like to step back and take a more strategic role rather than an owner/manager. By acquiring a similar company to your own, you will have access to the management team with the same skillset as you. Most likely the acquired management team will be more than happy to be put in charge of the bigger entity, allowing you to take a step back, maybe completely or in a Chairman of the Board type role. This will free up your time to look at more acquisitions too!

Making an acquisition can be a long and arduous task, as finding the right targets can be time consuming, often it can be awkward to approach a competitor in case they say no. Capital A are a strategic acquisition search partner. We can fill your pipeline with acquisition targets, make a first approach to see if they’re interested and negotiate an offer, if you would like some help in this department then please get in touch.

]]>Strategic Mergers Acquisition M&A Processhttp://www.capitala.co/business/16019/strategic-mergers-acquisition-ma-process/
Wed, 04 Jul 2018 08:10:14 +0000http://www.capitala.co/?p=16019Mergers and Acquisitions (M&A) is a process involving the acquisition of another company, where one company, usually the larger acquires a smaller target company and merges them with their business. This can sometimes happen between two businesses of a similar size which is more often called a merger when management teams from both companies control the new company. More often than not, the larger company acquires the smaller company and their management team controls the acquired company, or oversees it.

Acquiring a company has several steps in the process, quite often the acquisition can be performed quite quickly, in perhaps less than a month from finding the company to closing the deal, if you have a motivated seller. Other times it can take several months or years to complete the deal, depending on the size and complexity of the companies involved.

The process starts with defining the strategic opportunity the acquiring company is looking to get, it could be that they’ve hit a pitch ceiling with a client and are unable to win larger contracts unless they have a bigger turnover, or it could be that the company is wanting to move into a new industry or vertical, or it could be that the business has built up a war chest of money and rather than leave it in the bank will acquire another company to add to their bottom line and make their money earn.

It’s important to define the strategy first before making a search as the best deals are often off market, or businesses that haven’t put themselves up for sale. Opportunistic acquisitions rarely work out, either the deal won’t close for whatever reason or it does close but differences in culture or long term goals cause problems within the larger company.

Here’s an overview of the M&A process to help you understand if your business is ready to complete an acquisition or merger.

The 10 Step Strategic Acquisition Process

Strategic acquisition searches are often completed by outsourced companies who specialise in creating M&A deals, like Capital A, or for larger companies this could be performed by an investment bank. The dealmaker will often work with the Chairman and CEO or Corporate Development team using the following process or something similar.

10 step M&A process will typically be:

Define the acquisition strategy – Decide why you are acquiring a business and what you are looking to achieve, what is the end result you are looking for

Set the strategic acquisition search criteria – You need to know exactly what you’re looking for, type of company, turnover or profit margin, number of employees, location, is it growing or distressed, etc

Search for acquisition targets – Contact influential movers and shakers in your network and perform an intensive search based on the above criteria, you can also advertise that you are making this search so opportunities can come to you. You can use Google to search for companies that fit the search strategy and check on Companies House, Duedil or CompanyChecker to find financial information

Perform a valuation of the target company – Once you have met the acquisition target’s owner or CEO and they have agreed that they are willing to discuss further you should request more detailed financial information, quite often this will come with the current owners interpretation of the finances, while this can add some colour to the numbers, you shouldn’t allow it to influence your valuation

Offer and negotiation – Make an offer based on your valuation, make sure you leave room for negotiation, don’t ever feel like you should offer exactly what you’ve calculated it’s worth to expedite an agreement as there will always be some negotiation. Business owners always think their business is worth much more than reality based on years of reading about unicorns. You should have a heads of terms agreement drawn up, this is an overview of what has been discussed and agreed but is not legally binding

Due diligence – Although you will have performed some preliminary due diligence during your search, once an offer is made you should now perform in depth due diligence, this part of the process ensures that any information given during the initial stages is accurate

Purchase agreement contract – If everything is OK from your due diligence then you now draw up the Share Purchase Agreement based on the heads of terms agreement made earlier and any changes based on revelations from your due diligence, this can be long and expensive using lawyers who tend to want to go back and forward over everything (and charge you for the privilege) it is best to have everything clear with the seller by phone or face to face so keep fees to a minimum

Organising finance for the acquisition – You will have perhaps already started organising your finances to cover the acquisition before now, but quite often if you are requiring debt finance the lender will require all the information from the previous steps and a signed contract to continue

Closing the deal and handing over the keys to your newly acquired company – You are now the proud owner of a brand newly acquired business, once the paperwork is done the process of gaining control of the pieces of the business begins. You will have to integrate the new business into your own company structure (if you have one), onboard your new employees and take control of the company finances

Valuing a business

There are many different ways to value a business, quite often you will have heard about ridiculous valuations in the news, but in the real world companies are valued based on much smaller multiples. Industry averages can be found online to give you a guide as to what your offer might be. A general rule of thumb would be for small businesses $1 – $5m t/o would be 3.5xEBITDA, $10 – $100m t/o around 5-8xEBITDA and anything larger is likely a industry consolidation of some type and the acquiring company can pay much bigger multiples to stifle any disagreements from the acquired boardmembers. Although these multiples can be handy rules of thumb, every industry is different and every business owner has their own ideas.

Structuring the acquisition deal

There are many ways to get to a deal, quite often the seller will just want you to give them loads of money so they can walk into the sunset and leave you with whatever headaches they had been dealing with, but this rarely happens. You should structure the deal so that you are safeguarded for as many eventualities as you can negotiate. The deal is often made of several slices like a badly cut pizza. You should offer an amount up front on closing of the deal, leave some of your payments to continue over a certain period, this could be several months for a small deal to several years for a larger one. This is to make sure that any warranties the seller has given you have long enough to be tested, quite often sellers want to get out of a business with a problem approaching on the horizon, the seller will be motivated to deal with the problem with you if required if you still hold onto some of their payments. You may have structured the deal so that the business can finance the future payments leaving you with less pressure to raise money when closing the deal, a good advisory will help you with getting a deal structure that suits your financial situation.

M&A advisors during the process

It is possible to go it alone and complete an M&A deal from end to end on your own using your own hard graft, some Google searches and readymade agreements, however if this is your first time it’s not advisable to do everything yourself. Larger companies may want help building their acquisition pipeline and will use a company like Capital A to introduce them to a larger pool of acquisition targets. Making searches for targets can be a much longer process than you initially expect and if you are a CEO or owner/operator that already has a full plate then adding another job to your long list of things to do is not always the smartest thing to do. Then there is legal help with negotiating contracts, if you are a company of a certain size it goes without saying that you will need a lawyer involved, BUT make sure your legal advisor has some M&A experience under their belt, if you have to hire a new firm that isn’t your usual legal advisor then do it early on in the process. Finally, you may want to hire an accountant that has due diligence experience, often entrepreneurs feel they can understand someone else’s financials easily, but if the target company is from a different industry then you should think about hiring someone.

The M&A process

The acquisition process isn’t as complicated as some professionals in the banking and legal professions would like to make you think, so if the business is small enough then it should be OK to do the bulk of the work yourself or with your team. Glean what you can from the internet and get out there and get some experience, follow this general acquisition process guide and you’ll be OK. If you find the strategic acquisition search process is tying up your time then maybe we can help.